What Is Financial Aid?

Financial Aid Explained

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Financial aid provides funding to help college students pay for higher education expenses such as books, tuition, fees, room and board, and supplies. It often takes the form of scholarships, grants, loans, and work-study programs.

Understanding the various types of financial aid, how they work, and how to apply for them can help you avoid unnecessary student debt. With this comprehensive guide, discover the free types of financial aid you don’t have to repay, along with loan options that can help to cover any remaining expenses. 

Definition and Examples of Financial Aid

In the 2019-20 school year—the most recent available data—the average annual cost for undergraduate tuition, room and board, and fees for first-time, full-time undergraduate students at a private nonprofit college or university was $53,200. At a public institution, the average cost was $25,500. Financial aid helps cover these costs so families don’t have to pay them in full. 

In 1965, President Lyndon Johnson established the federal government as the primary provider of financial aid by implementing the Educational Opportunity Grant (EOG) Program. Today, more than 50 years later, the federal government continues to be a main source of financial aid for U.S. college students. 

Financial aid can come from a variety of sources, including the federal government, state agencies, community organizations, corporations, foundations, high schools, and more. It most commonly comes in the form of grants, scholarships, loans (private and federal), and work-study programs.

How Financial Aid Works

When you’re looking for financial aid for college, the process generally starts by learning an aid program’s requirements and submitting an application. The source of the aid will then review your application to determine if you qualify. If you do, they will calculate the amount you qualify for and the terms/conditions attached to it. 

The qualifications for financial aid are typically based on merit or need. To qualify for merit-based aid, a student’s achievements, academic or extracurricular, are taken into account. Need-based aid depends on a student’s level of financial need, often determined by analyzing their family’s income, benefits, and assets. 

Whether you receive need-based or merit-based financial aid depends on the type of aid you apply for. 

Types of Financial Aid

Financial aid comes in many forms and is designed to help in different ways. But you don’t have to choose just one type of aid. You can often combine multiple types to cover your expenses. 

  Type Qualification Example
Grants Gift Need based Pell Grant
Scholarships Gift Merit and need based College Board Opportunity Scholarships
Work-Study Programs Earn Need based Federal Work-Study Program
Federal Student Loans Borrow Need based Direct Loans

Grants

Grants are need-based aid programs that provide free money to students for higher education expenses. One highly common need-based grant is the Pell Grant, which is usually awarded to undergraduate students who show a high level of financial need. The Pell Grant offers amounts up to a yearly maximum, which is $6,495 for the 2021-22 award year.

Grants are also offered from a variety of nongovernment sources. In most cases, the money offered from grant programs typically doesn’t need to be repaid (as long as the program requirements are fulfilled). 

Scholarships

Scholarships are financial aid programs awarded to students who meet the requirements set by the sponsoring party. Scholarships can be need based or merit based.

Full scholarships cover all of a student’s tuition expenses and textbooks, and they also may provide funds for living expenses. Partial scholarships, on the other hand, only pay for a portion of a student’s college expenses. 

The College Board has a Scholarship Search library that allows you to scan through over 2,000 scholarship programs offering up to $6 billion in aid.  

Work-Study Programs

Work-study programs offer qualifying college students part-time jobs to help pay for their education. The federal work-study program encourages work that’s related to your studies or that serves the community. To be eligible, you must:

  • Be an undergraduate, graduate, and professional student 
  • Demonstrate financial need
  • Attend a school that participates in the federal work-study program

Federal Student Loans

The federal government offers a variety of student loans that can be used to pay for college expenses. While you will be charged interest, these loans can offer benefits over private loans, such as fixed interest rates, loan forgiveness programs, postponement options, flexible credit requirements, and income-driven repayment plans. 

Private student loans may also be an option, however, they don’t have the same protections as federal student loans. 

How To Get Financial Aid

You can apply for financial aid by completing the Free Application for Federal Student Aid (FAFSA). The FAFSA is a form used to determine your eligibility for financial aid from the federal government, many state governments, and most colleges. 

When you submit the FAFSA, there are several factors that determine your eligibility, including:

  • The size of your family
  • Your year in school
  • The cost of attendance
  • Your Expected Family Contribution (EFC), which is calculated based on your family’s income, assets, and benefits

FAFSA applications open on Oct. 1 of each year for the following school year and close on June 30 at 11:59 p.m. CT. (or 12:59 a.m. EDT) at the end of each school year. For the 2021-22 school year, the FAFSA became available on Oct. 1, 2020, and must be submitted by no later than June 30, 2022. To be considered, it is best to apply as early as possible but no later than the school year’s deadline.

After you submit your application, you can check your status using the Federal Student Aid (FSA) ID that you receive. You will then receive your Student Aid Report. Your aid report will explain all of the types of aid you qualify for, the amounts of each, and the leftover costs you can expect to pay for the year. If you are considering more than one college, you’ll be able to review the aid offers from each school and accept the one that suits you best. 

The Federal Student Aid Office recommends choosing aid in this order:

  1. Free money (scholarships and grants)
  2. Earned money (work-study programs)
  3. Borrowed money (federal student loans)

The financial aid office at your chosen school will often apply your aid to your outstanding balance and send you the remaining balance. If you still have an outstanding financial need, you can seek out financial aid from organizations with programs not included in the Student Aid Report.

Is Financial Aid Worth It?

According to The College Board, during the 2019-20 school year, there was a total of $242 billion distributed to undergraduate and graduate students from all grants, loans, tax credits, and work-study programs. The average amount received by an undergraduate student in the same year was $14,940, and $27,310 per graduate student.

It's important to note that you must remain eligible for financial aid throughout your time at a college or university. When you receive financial aid from your college or university, you must stay eligible to continue receiving aid. Eligibility requirements vary per institution, but the main thing schools are looking for is that you maintain “satisfactory academic progress,” which often includes having a certain grade point average (GPA).

Financial aid can help to lower the costs of your college education, reducing the amount you and your family have to pay or borrow. Choosing which aid to apply for will depend on a case-by-case basis. Generally, though, grants and scholarships are preferred, as you don’t have to pay them back in most cases. However, federal loans can also offer a more accessible and affordable alternative to private loans.

If you receive financial aid award offers from more than one school, look for the one that provides you with the most gift-based aid, as you won’t have to pay it back down the line. 

Key Takeaways

  • Financial aid offers college students and their families partial or full funding to cover the costs of higher education.
  • There are multiple types of financial aid, including grants, scholarships, work-study programs, and loans. 
  • You can find out how much financial aid you can get by completing and submitting the FAFSA. 

Frequently Asked Questions (FAQs)

What is the maximum income to qualify for financial aid?

Maximum income limits will vary depending on the source of the financial aid you are seeking. However, when seeking federal student aid, there is no income limit. Instead, when you submit the FAFSA, many factors will be taken into consideration to determine your eligibility, including the size of your family, your year in school, the cost of attendance, and your EFC. 

What is financial aid disbursement?

Financial aid disbursement refers to the process of a financial aid source sending approved financial aid to a recipient. In many cases, the funds go directly to a student’s college to cover the costs. In some cases, though, they may be sent to the student. Disbursements are typically received in two or more installments.

What financial aid is available for graduate students?

Graduate students may be eligible for various types of federal student aid including Pell Grants, the Federal Work-Study Program, PLUS Loans, and Teacher Education Assistance for College and Higher Education (TEACH) Grants. They may also qualify for aid from their school, state government, employer, foundations, and other organizations that provide scholarships. 

Is there a limit on how much financial aid you can receive?

The maximum amount of financial aid you can receive depends on the program and your level of need. For example, when you fill out the FAFSA, your school subtracts your EFC from your Cost of Attendance (COA) to determine your financial need, becoming your maximum limit for financial aid. Further, specific programs often have limits. The Pell Grant, for example, has a yearly maximum as well as a limit on how many times you can receive the grant in your life. 

What is a financial aid warning?

A financial aid warning is an alert to warn you that you are not currently meeting the standards to remain eligible for federal and other financial aid programs. If you don’t come into compliance within a given period, your aid will be suspended. You must meet the basic eligibility criteria throughout the time you’re receiving aid, not just when you apply. 

What GPA is required for financial aid?

The GPA requirement for financial aid will vary depending on your source of financial aid and possibly your school. When it comes to federal aid, your college defines the GPA requirement you must meet to achieve satisfactory academic progress. To find out the limit, you’ll need to check with your school’s financial aid office or website.